The Weekly #197
I drink your milkshake.
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There will be blood.
It’s been another week of crypto markets sliding further with the Federal Open Market Committee (FOMC) doing little to buoy risk asset prices.
Global crypto market capitalization fallen 9.5% with BTC falling 13%.
The key headline was the confirmed 50 BPS rate hike by the Fed - in line with market expectations.
Yet, we are seeing a market react in a way where that news was unexpected. We’ve heard time and time again inflation is the their north star despite risks of job losses and sharp economic contraction. As Powell cautioned:
“Monetary policy is often said to be a blunt instrument, not capable of surgical precision.”
Reducing the Fed’s balance sheet, reducing global dollar liquidity, and higher cost of credit remained a fundamental macro headwind.
The Fed took away the punch bowl was taken away and the check was closed out. Now the hangover is kicking in.
With the market showing muted activity so far in 2022, investors were most likely doing a ‘wait-and-see-approach’ - hanging their hat on some last scrap of a dovish Fed that is facing a looming recession. Even the Fed’s Kashkari states the uncomfortable truth for many.
Since the rate hike announcement BTC is down 13.5% while higher risk DeFi PERP (DeFi Index) is down 17%. Underperformance for assets down risk continuum since the announcement confirms the de-risking moves by cryptoasset investors.
The dollar index (DXY) printed a 19-year high at 104.11 off the back of consecutive rate hike expectation, jitters regarding global growth, and rising U.S. bond yields.
Dollar strength has the ability to hold back gains in risk assets including equity. Companies in the S&P 500 generate ~40% of their revenue outside of the U.S.
Large denominated debt in emerging markets are also harder to pay off.
Now, crypto networks don’t export ‘abroad’ but, with cryptoassets being traded as growth/value stocks, right now it’s all one of the same thing.
Right now, the world depends on flows of dollars. While the Fed now transitioning to a monetary tightening policy, global debt markets continue to drive sustained demand for USD to make interest payments.
It shouldn’t be a surprise that dollar strength creates an uphill battle for cryptoassets priced in dollar. The value of the denominator is going up.
Charting crypto MCAP vs. DXY (dollar index) shows the long-standing negative correlation between the two. Periods of negative correlation can last up to ~12 months before a brief reset.
Technical indicators also paint a bleak picture. BTC/USD finally broke below $34k with the asset eyeing support at $33k and and $31.3k. Daily RSI signals prices are fast becoming oversold with a relief bounce on the cards near-term.
However, the futures market also offer no clear signal of a bottom yet. A slightly positive funding rate indicates that dominant trader positioning is only moderately bullish. Historically, we’ve needed to see a bottom in the futures market to see a bottom in the spot market for BTC.
On-chain indicators focusing on short-term traders (STH-MVRV) show intense capitulation is well underway but a brief relief rally could occur. STH-MVRV falling below 0.8 has often coincided with local bottoms during prolonged bearish periods.
However, the journey to a ‘macro bottom’ may still be far out. The percentage of entities in profit doesn’t deterministically state when bottoms will occur but we often see a peak capitulation below 0.5 when they happen.
Although a different market then, the 2014 -2015 illustrates how peak capitulation can extend significantly. April 2014-March 2015 marked a period of dollar strength (+26%) on rate rise hopes at the time.
Bitcoin electricity cost model (see previous Weekly) also prints a $23k bottom which somewhat aligns with this outlook.
So it seems we have a reactionary market that is sobering up. Expect relief rallies. Expect there will be blood.
We have a thirsty Fed who is drinking the dollar milkshake while hopium crypto investors don’t want to give up the glass in the first place.
Lido Finance sees strong deposit commitment despite wider market volatility. The network has now seen over 4.1m ETH deposited and is outpacing that of competitor, Rocket Pool (180k ETH) over the past month.
However, notable increases can be seen in alternative EVM ecosystems like Polygon. MATIC staking via Lido has climbed to nearly 17m MATIC but Lido has a long way to go to break into Polygon’s market. Lido’s market penetration for Polygon stands at a mere 0.6%.
Ref Finance is bucking the wider trends when it comes to value growth. The DEX native on NEAR has seen TVL breach $250m (driven by USDT so far) - a near 2x in growth since April.
Ref Finance has now launched liquidity aggregation between NEAR and Aurora solidifying the bridge between the two ecosystems.
NEAR’s native ecosystem dominance has now climbed to nearly 0.4%, marking strong growth relative to the wider market. Prices have yet to reflect growth at the L1 (NEAR) and dApp level (Ref Finance) with macro headwinds creating a significant uphill battle.
Very few names printing green for the week - globally and within DeFi. Layer 1 blockchains like Tron buoyed for the week against sea of red due to headline catalysts including FIFA sponsorships and stablecoin launches.
Top 100 (7d %):
Curve DAO Token (+2.7%)
DeFi (7d %):
Nest Protocol (+15.2%)
Nerve Finance (+14.7%)
Curve DAO Token(+2.7%)
Votium, a voting service for vlCVX holders, now supports veCRV. Token holders can delegate their voting power to the service to automate bribes collection.
Trisolaris, DEX on Near Aurora, launched 5pool, a StableSwap pool of 5 tokens and deep liquidity. LPs can deposit USN, UST, FRAX, USDT and USDC. APR TBD.
Hop protocol announced HOP token and an airdrop, 1b HOP will be issued of which 8% will be airdropped to early users.
Theme 1 - Fidelity and Cowen are leading the Wall Street pack in adoption, both custodying assets and investing in ventures across the broker dealer (market making) tech stack in preparation for institutional adoption:
Wall Street Reluctantly Embraces Crypto (WSJ)
CFTC, SEC Cooperation Key to Solving Crypto’s Regulatory Woes, FTX CEO says (Blockworks)
Theme 2 - Bitcoiners UNITE! Anti-mining legislation stalled in the NY state legislature. Saylor, Dorsey, and even Ken Griffin of Citadel fame continue to beat the drum of support last week in letters to the EPA and at the Milken Institute Global Conference respectively:
The NY Mining Moratorium’s Odds Just Got a Lot Worse (CoinDesk)
Saylor, Dorsey, Other Bitcoin Advocates Send Letter to EPA Rebutting House Democrats' 'Misperceptions' (Decrypt)
Theme 3 - SEC’s regulation by enforcement is ramping up with 20 new hires on the newly branded Crypto Assets and Cyber Unit team. SEC Commissioner Peirce vehemently disagrees with the approach and mandate, as enforcement actions tick up:
U.S. Department of Justice Charges Florida Executive Over Alleged Involvement in $62,000,000 Crypto Fraud (Daily Hodl)
SEC Crypto Team Getting 20 More Officials in Bid to Crack Down (Bloomberg)
Global Market Cap
$1.62T; Global market cap has fallen by 12% with risk-off sentiment extending further. Markets have now broken below YTD low of 24th Feb 2022 ($1.65T).
DeFi MCAP And Dominance
$108B; DeFi market cap has fallen 14% - more than global MCAP over the past week. De-risking lower down the risk curve from more illiquid names. DeFi dominance has fallen 2% over the same period. DeFi a limited place for investors to deploy risk while sentiment is bearish.
Relative Market Caps
Bitcoin dominance keeping steady at ~47%. Bitcoin keeping relative value to most other cryptoasset names for now. Shrinkage in assets ranked 11-100 in MCAP indicating flight to higher up the risk curve and/or stability.
BTC/USD and ETH/USD
BTC/USD broke below $34k with bearish MACD. ETH/USD looking to break below 2.4k. Daily RSI near oversold for both pairs. ETH underperformance against BTC for past week (-10%). ETH/BTC holding support at 0.073 for now. Daily RSI still neutral with potential more room to fall before a price reset is seen.
BTC & ETH; ETH 30D vol has kept flat while spike in BTC over the past week. 1W Implied volatility for BTC has spiked to 67.18% - the highest since 23rd March 2022. 1W IV for ETH spiked to 68.41%. Together could indicate the market is starting to wake up.
Traders opening new positions or adding to existing positions with open interest for Bitcoin and Ethereum climbing 10% and 8% respectively. Funding rate moderately positive with no sign of clear capitulation in the futures market. Option traders taking out more put positions relative to calls over the past week for BTC and ETH.
Order books much heavier on the bid side. Slightly heavier resistance up to $33.5k. (Source: Bitcoinity).
Crypto vs. Equities vs. Gold vs DXY; Cryptoassets maintaining a very strong positive relationship to equity indices (0.93+ 30D) indicating cryptoassets are being traded as value and growth stocks. Gold under pressure from stronger dollar.
GBTC; GBTC discount holding steady over the past week despite bearish technical signals being printed. Discount forecast to gravitate closer to the 30% low. 30D GBTC volumes are flat for the week (3.79M).
ETHE; No notable change in the ETHE discount over the past week. Discount is being tested at the ATH levels -28%. Stronger possibility we see new ATH in discount over coming weeks. Secondary market volumes flat similar to GBTC over the past week (3M).
Bitcoin Mempool Activity
Size in MB; The mempool size for the Bitcoin network has spiked over the past 2 days as BTC breaks key technical levels. Indicates higher network congestion as higher fee transactions are prioritized over lower fee transactions.
Bitcoin hashrate (7D) has kept flat over the past week. Mining difficulty is forecast to increase 4% in the next adjustment. Marathon Digital (MARA) indicated last week they are needing to increase their cash position (by $500m) and may look to sell BTC in the future to cover CapEx - a further potential headwind for BTC price medium-term.
On-chain real (BTC) & off-chain volume; BTC on-chain volume has increased 4% over the past week. BTC spot volumes (7d MA) has increased 9% while ETH spot volumes has increased just 3%.
Active User Base
BTC; Active entities (30d MA) has fallen by 0.5% over the past week. No notable change despite wider market volatility.
BTC, ETH; The rate of net exchange outflows for BTC and ETH continues to slow down. ETH sees $2.2B which is now lower than BTC’s $3B in net outflows. This may imply any accumulation by traders is slowing down relatively in recent weeks.
🎙️ Crypto Bahamas - Su Zhu [The FTX Podcast]
🎙️ Blockchain.com on Dallas Cowboys Sponsorship [The Scoop]
🎙️ The Transformation of Everything [The Breakdown]
🎙️ Bitcoin Smart Contracts [The Metaverse Podcast]
🎙️ Ethereum’s Eternal Optimist [Bankless]
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